Identifier
Created
Classification
Origin
07SAOPAULO780
2007-09-20 17:34:00
CONFIDENTIAL
Consulate Sao Paulo
Cable title:  

DELFIM NETTO: NOT BULLISH ON BRAZIL"S ECONOMY OR

Tags:  ECON PGOV PINR ELAB EAGR BR 
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PP RUEHRG
DE RUEHSO #0780/01 2631734
ZNY CCCCC ZZH
P 201734Z SEP 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7488
INFO RUEHAC/AMEMBASSY ASUNCION 3115
RUEHBO/AMEMBASSY BOGOTA 1597
RUEHBR/AMEMBASSY BRASILIA 8601
RUEHBU/AMEMBASSY BUENOS AIRES 2875
RUEHCV/AMEMBASSY CARACAS 0563
RUEHLP/AMEMBASSY LA PAZ 3493
RUEHPE/AMEMBASSY LIMA 1182
RUEHMN/AMEMBASSY MONTEVIDEO 2447
RUEHSG/AMEMBASSY SANTIAGO 2149
RUEHRG/AMCONSUL RECIFE 3791
RUEHRI/AMCONSUL RIO DE JANEIRO 8335
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 SAO PAULO 000780 

SIPDIS

SIPDIS

STATE FOR WHA/EPSC, INR/IAA, INR/R/AA
STATE PASS USTR FOR KDUCKWORTH
NSC FOR TOMASULO
DOE FOR GWARD
TREASURY FOR JHOEK
USDOC FOR 4332/ITA./MAC/WH/OLAC
USDOC FOR 3134/USFCS/OIO
USAID FOR LAC/AA

E.O. 12958: DECL: 09/19/2017
TAGS: ECON PGOV PINR ELAB EAGR BR
SUBJECT: DELFIM NETTO: NOT BULLISH ON BRAZIL"S ECONOMY OR
ITS POLITICAL LEADERSHIP

REF: A. BRASILIA 1745


B. SAO PAULO 749 AND PREVIOUS

C. 06 SAO PAULO 907

Classified By: CONSUL GENERAL THOMAS J. WHITE. REASON: 1.4(D)

SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 04 SAO PAULO 000780

SIPDIS

SIPDIS

STATE FOR WHA/EPSC, INR/IAA, INR/R/AA
STATE PASS USTR FOR KDUCKWORTH
NSC FOR TOMASULO
DOE FOR GWARD
TREASURY FOR JHOEK
USDOC FOR 4332/ITA./MAC/WH/OLAC
USDOC FOR 3134/USFCS/OIO
USAID FOR LAC/AA

E.O. 12958: DECL: 09/19/2017
TAGS: ECON PGOV PINR ELAB EAGR BR
SUBJECT: DELFIM NETTO: NOT BULLISH ON BRAZIL"S ECONOMY OR
ITS POLITICAL LEADERSHIP

REF: A. BRASILIA 1745


B. SAO PAULO 749 AND PREVIOUS

C. 06 SAO PAULO 907

Classified By: CONSUL GENERAL THOMAS J. WHITE. REASON: 1.4(D)

SUMMARY
--------------


1. (C) Former Finance Minister Antonio Delfim Netto told CG
September 17 that the Brazilian economy is all right for now
despite recent market turbulence, but he has "serious doubts"
about the next 5-10 years, especially if the global economy
enters a down cycle. He characterized Brazil's focus on
agriculture and minerals as risky, noting that the country's
relatively sound fundamentals - e.g., strong reserve
position, current account surplus - could disappear overnight
if global commodity prices change. Delfim stressed that he
had supported President Lula's re-election and sometimes
advises him, but believes the President isn't fully aware of
the fragility of Brazil's economic condition and that his
advisors simply aren't thinking ahead or planning for
contingencies. Thus, Brazil has benefited from a favorable
international economy, but not nearly as much as it could
have. Commenting on the country's political situation, Netto
characterized the leader of the Landless Movement (MST) as a
possible Brazilian Hugo Chavez. He also did not have much
good to say about any of the likely 2010 presidential
candidates and expressed concern that some may have populist
tendencies. End Summary.

A LONG VIEW OF THE BRAZILIAN ECONOMY
--------------


2. (SBU) Consul General (CG) and Poloff met September 17
with former Minister Antonio Delfim Netto to discuss the
current political and economic situation. Netto was
accompanied by economist and lobbyist Janio Quadros Neto, the
AMCIT grandson and namesake of the late Brazilian President

(January-August 1961). Delfim Netto served as Federal Deputy
from Sao Paulo 1987-2006 before being defeated last year in
his bid for re-election. He supported President Lula's
re-election in 2006 and, though now semi-retired, serves Lula
as an informal advisor. Nevertheless, he is not impressed
with the government's economic policy. A Finance Minister
(1967-74) and Planning Minister (1979-85) under the military
dictatorship, Delfim takes a long view of Brazil's economy as
his 80th birthday approaches, joking at one point that since
graduating from college in 1947, "I've lived through all the
crises, and some of them I even produced!"


3. (C) "Back when Brazil was growing," as Netto referred to
the "economic miracle" of the 1970s, taxes consumed 24
percent of GDP. Now the figure is 37 percent, and Netto
estimated that the government spends about 3 percent of GDP
on tax collection efforts. He believes the government should
reduce its footprint and limit itself to those areas where it
can make modest but tangible improvements, such as health
care, education, and other social areas. Infrastructure
development, in his view, "should be given to the private
sector." Within the Lula administration, however, there is
an "ideological slant" led by Dilma Rousseff, equivalent to
the President,s Chief of Staff, who, in Netto's words,
"wants to construct a socialist state but by way of a tour
through capitalism." Rousseff is in charge of the Growth
Acceleration Program (PAC),which aims to stimulate the

SAO PAULO 00000780 002 OF 004


economy via large infrastructure projects, many of them
funded by the federal government or by parastatals.


4. (SBU) Netto argued that the GoB's monetary policies,
while effective in keeping inflation low, are hurting
Brazilian industry because the high interest rates lead to
currency overvaluation. The combination of a strong currency
and rising wages (the minimum wage has risen by 90 percent
over the past five years, pushing all salaries up) puts
Brazil in a disadvantageous position vis a vis China. The
high internal costs of transportation and logistics caused by
infrastructure deficiencies add to Brazil's competitiveness
woes. At some point, Netto predicted, Brazil is "going to
hit the wall again." The country may even experience another
spurt of growth, but then some external shock or crisis will
swamp the country's economy, probably in the first year of
the next administration (2011),he speculated, commenting
that "Lula is always lucky."

GOVERNMENT IS "SURFING"
--------------


5. (SBU) Fundamentals are much better than in the past,
Delfim acknowledged. The State has nearly USD 170 billion in
reserves and a healthy current account surplus. But optimal
global economic conditions represent a lost opportunity for
Brazil. While countries such as India and China are booming,
Brazil struggles to achieve four or five percent annual GDP
growth. Many commentators give the government a "10" grade
for its economic management, perhaps because of its
orthodoxy, but Netto thinks it probably deserves a "3" at
most. Lula's Ministers and advisors are enjoying the
"miracle," surfing on the global wave, and not thinking about
the country or its future. Nobody remembers the crises of
the past or thinks about how to avoid or minimize the next
one. (Note: The sole exception, Netto said, may be Harvard
Professor Roberto Mangabeira Unger, Secretary for Long-Term
Planning. End Note.) Brazil should be expanding its
economy, creating jobs, reducing the tax burden, and
improving management of health care and education, thus
creating the conditions for sustainable long-term economic
growth.


6. (SBU) There is a dearth of serious political leadership,
Netto complained. President Lula's Workers' Party (PT) is
"primitive," and at its recent National Congress (ref B)
demonstrated it is still in its "jurassic" phase. Netto
singled out as "stupidity" a PT resolution supporting a
plebiscite to revisit the 1997 privatization of mega-mining
concern River Doce Valley Company (CVRD). In Delfim's view,
the world has accepted the "WTO fantasy" that China will
devote itself to industry, India to services, and Brazil to
agriculture. At some point in the years to come, Delfim
predicted, prices of metals, foodstuffs, and even petroleum
will fall. What, he asked rhetorically, will happen then to
the biofuels boom that Brazil is so excited about?

REFORM NOT IN THE CARDS
--------------


7. (SBU) Labor reform is not on the table, Netto observed,
even though Brazil has the toughest labor laws in the world.
The tax system is "a farce," and there is no hope of
reforming it because it involves extremely complex questions
of federalism. Since colonial times, Delfim pointed out,
every revolution in Brazil was about taxation. Right now,

SAO PAULO 00000780 003 OF 004


Congress is considering renewal of the CPMF financial
transactions tax, a "provisional measure" that has already
been in place for most of the past 14 years. CPMF renewal
will ultimately pass, said Delfim, because many in the Sao
Paulo Congressional caucus obey Governor Jose Serra, and many
Deputies from Minas Gerais are beholden to Governor Aecio
Neves. The two states combined account for 123 of the
Chamber of Deputies' 513 members. Both Serra and Neves are
potential Presidential contenders in 2010, and it would be
suicidal for them to oppose the CPMF and thus cause disarray
in the nation's finances.


8. (SBU) The situation surrounding Senate President Renan
Calheiros - narrowly absolved September 12 of breach of
parliamentary decorum but facing several more charges (ref
A)- is a "tragedy," in Netto's view, but Calheiros, though in
many ways typical of Brazil's political system, doesn't
really matter. What is important, he said, is who will be
elected President of the Chamber of Deputies and the Senate
in the 2009 session, because they will determine whether any
legislation will pass. Due to the electoral calendar, Lula
has a very limited period of time in which he can actually
govern, and has already lost much of it to the Calheiros
scandals. He will need Congressional support in 2009 to make
anything happen. Following municipal elections and
Congressional leadership elections, a "new power structure"
will be in place as the country prepares for the 2010
presidential elections.

PRESIDENTIAL HOPEFULS
--------------


9. (C) Governors Serra and Neves, both of the opposition
Social Democracy Party of Brazil (PSDB),are the only two
real presidential candidates, Netto said. Lula's PT has
"nobody". PT Senator Aloizio Mercadante "destroyed himself"
by first trying to cut a deal that would avoid Calheiros's
expulsion, then abstaining in the secret vote, and finally
disclosing his vote and portraying it as an act of political
principle. "He lost at least half his votes," Delfim said of
Mercadante, who was elected to the Senate in 2002 by more
than 10.4 million "paulistas". He also did not think Dilma
Rousseff or Bahia Governor Jaques Wagner had a chance. The
PT, Delfim said, will survive, but it is obvious that after
Lula leaves, the party will have a leadership problem.


10. (C) Lula may try to support someone from his governing
coalition, Delfim speculated, mentioning Defense Minister
Nelson Jobim of the Brazilian Democratic Movement Party
(PMDB). Asked about Federal Deputy Ciro Gomes of the
Brazilian Socialist Party (PSB),Netto expressed deep concern
and likened him to a less intelligent Serra. While not a big
fan of Governor Serra, considering him authoritarian,
interventionist, and anti-business - he recalled Serra's
action as Health Minister asserting Brazil's right to break
patents on HIV/AIDS drugs - Netto likes Gomes even less:
"Serra is scary but he knows things. Ciro is scary but he
doesn't know anything and only pretends to know." Netto
believes Gomes, if elected, could become "Brazil's Chavez"
and would attempt to govern by populist rhetoric and outdated
socialist economic principles.


11. (C) Though critical of Gomes, Delfim asserted that
Brazil already has another, &real8 Chavez in its political
life - Joao Pedro Stedile, head of the Landless Rural
Workers' Movement (MST). The MST is a political organization

SAO PAULO 00000780 004 OF 004


that presses for agrarian reform and foments invasions of
farms throughout the country. During an April 2006 visit to
Curitiba at the invitation of Parana's populist Governor,
Roberto Requiao, Chavez met with Stedile and militants from
the MST and an affiliate, Via Campesina, calling for
solidarity among Latin American social movements. Aligned
with Lula,s governing coalition and generally supportive of
the Lula administration, the MST recently marched on the
capital in order to illustrate its displeasure over what many
in the MST see as Lula,s abandonment of the PT,s leftist
principles. Stedile, Netto pointed out, is an economist, a
good organizer with a gift for making people believe in him,
and has control of a "paramilitary organization." (Comment:
Netto did not elaborate on this last characterization, but
many in Brazil's political and economic elite consider MST
militants a gang of armed thugs, trained by the FARC and
other revolutionary movements, and bent on taking over the
country. End Comment.) Netto acknowledged that his view of
Brazil's political and ecoomic situation is pessimistic, but
insisted thatit is also realistic.

WHAT'S WRONG WITH THE POLTICAL SYSTEM
--------------


12. (C) Brazil's political apparatus despertely needs
overhauling, Delfim said. The current system, in his view,
is Fernando Henrique Cardos's (FHC, President 1995-2002)
worst legacy. FHCpushed to amend the 1988 Constitution to
permit e-election, and, in Netto's words, "bought the vot"
in Congress. Now Brazil has "re-election without social
control," in which politicians own the instruments of power -
newspapers, radio, and television - and use them to
perpetuate their own power and influence. Proportional
election of federal and state deputies is the other major
problem, Netto said, arguing that it distorts the composition
of Congress in favor of the evangelical churches. He
supports a single-district system similar to the one in the
United States.

COMMENT
--------------


13. (C) When we last met with Delfim Netto in August 2006
(ref C),he said he was supporting Lula because, unlike his
opponent, Lula would be able to convince the PT and other
leftist parties not to block badly needed reforms of the tax,
social security, and labor systems. While he professes to
like and admire Lula, he does not hide his disappointment: He
minces no words about the economic path the government is
following and sees real pitfalls in the current strategy.
While some of his fears may be exaggerated (such as the MST
resorting to paramilitary tactics in pursuit of
redistribution of land and wealth),they are no more so than
Lula's celebration of what he calls the best economic moment
Brazilians have ever known. End Comment.


14. (U) This cable was coordinated with Embassy Brasilia.
WHITE